ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

 

The following table sets forth the names and positions of our executive officers and directors. Our directors serve for one year or until successors are elected and qualify. Our Board of Directors elect our officers, and their terms of office are at the discretion of the Board, except to the extent governed by an employment contract.

 

Name		Age		Position		With Company Since
Fahad Syed		41		Chairman and Chief Executive Officer		May 2005
Vasan Thatham		51		Chief Financial Officer		June 2005
Charlotte G. Denenberg		61		Director		November 2004
Joseph Perno		66		Director		April 2006

 

Below are the biographies of each of our officers and directors as of January 8, 2010.

 

FAHAD SYED. Mr. Syed has been the Chairman and Chief Executive Officer of the Company since May 2006. Mr. Syed has been a Director of the Company since May 2005. Mr. Syed is an entrepreneur and co-founder of UCA Services, Inc. and has more than 14 years of experience in Global Services. Mr. Syed is an expert in the development of best practices in IT, channel and direct sales strategies and effective service delivery models. Mr. Syed was the Managing Director of UCA Services, Inc, from June 2003 to May 2005 and he is currently the Chief Executive Officer of UCA Services, Inc. Prior to that, Mr. Syed was Vice President of IT services with UCA Computer Systems, Inc., a system integrator, from December 1998 to May 2003. Previously, Mr. Syed held prominent positions in development and management of financial products at the Housing Development Finance Corporation (HDFC), a pioneer private sector housing finance institution in India. Mr. Syed holds a Masters Degree in Development Sciences from Tata Institute of Social Sciences, Mumbai, India, a Bachelors degree in Sociology from Aligarh University, India and a Diploma in Systems from National Institute of Information Technology, Mumbai, India.

 

VASAN THATHAM. Vasan Thatham has been Vice President and Chief Financial Officer of the Company since June 2005. Prior to joining the Company, from February 1999 through June 2005, Mr. Thatham was Vice President and Chief Financial Officer of Provo International, Inc., a company engaged in providing Internet and telecommunications services. Prior to that, Mr. Thatham held various positions with Esquire Communications, Ltd., Strings Ltd., Ernst & Young in Kuwait and KMPG Peat Marwick in India. Mr. Thatham is a chartered accountant under the laws of India.

 

CHARLOTTE G. DENENBERG. Ms. Denenberg has been a Director of the Company since November 2004. She received a BA in Psychology and Mathematics with Highest Distinction, Phi Beta Kappa, from Northwestern University, and an MS and a PhD in Mathematics from the Illinois Institute of Technology. For the past two years she has consulted for a variety of companies in the telecommunications industry. From 1998 to 2002, she worked for Metromedia Fiber Network Services, Inc. (MFN) as Vice President, Optical Infrastructure (December 1998 to June 2000) and as Vice President and Chief Technology Officer (July 2000 to June 2002). MFN was engaged in the design, installation and maintenance of inter-city and intra-city optical fiber networks.

 

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JOSEPH PERNO. Mr. Perno has been a Director of the Company since April 2006. Since his retirement in March 2003, he has been a consultant to emerging technology companies. From March 1994 to March 2003, he was Senior Vice President of Technology at Chubb Corporation, a provider of property and casualty insurance to businesses and individuals worldwide. Prior to that, he was associated for 18 years with Chubb Corporation and Crum and Foster Insurance Organizations in various capacities. Mr. Perno has been a member of the LOMA Property and Casualty Systems Committee for twenty three years, serving as Chairman of that organization from 1991 to 1992. He also served on the Boards of Directors of ACORD, IVANS, the North River Insurance Company, US Fire Insurance Company, The Westchester Insurance Company and the agency systems vendor, Redshaw, Inc.

 

Family Relationships

 

There are no family relationships among the directors or executive officers of the Company.

 

Involvement In Certain Legal Proceedings

 

None of our officers, directors, promoters or control persons have been involved in the past five years in any of the following:

 

(1) Any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

(2) Any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

 

(3) Being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, or any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

 

(4) Being found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.

 

Code of Ethics

 

On March 3, 2005, we adopted a Code of Ethics (the "Code") that applies to the Company, our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of the Code will be provided, without charge, upon request  sent to our Secretary at 299 Cherry Hill Road , Parsippany, NJ 07054.

 

Audit Committee

 

The Audit Committee is responsible for making recommendations to the Board of Directors as to the selection and independence of our independent registered public accounting firm (the "Independent Auditor"), maintaining communication with the Independent Auditor, reviewing the annual audit report submitted by the Independent Auditor and determining the nature and extent of problems, if any, presented by such audit warranting consideration by our Board of Directors. Currently, the Company does not have an audit committee and in accordance with ss.3(a)(58)(B) of the Securities Exchange Act of 1934, the entire Board of Directors is acting as the Company's Audit Committee.

 

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Compensation Committee

 

The Compensation Committee is a standing committee of the Board of Directors and is authorized to review and make recommendations to the Board of Directors on all matters regarding the remuneration of our executive officers, including the administration of our compensation plans. The Compensation Committee is intended to be comprised of at least three members. Currently, the Compensation Committee is comprised of only Ms. Charlotte G. Denenberg.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

 

Summary Compensation Table

												Nonqualified
										Non-Equity		Deferred
							Stock		Option	Incentive Plan		Compensation		All Other
		Salary		Bonus			Awards		Awards(3)	Compensation		Earnings		Compensation		Total
Name and Principal Position	Year	($)		($)			($)		($)	($)		($)		($)		($)
Fahad Syed	2008	257,000															257,000
Chief Executive Officer	2007	335,000															335,000
Vasan Thatham	2008	150,000							80,124								230,124
Chief Financial Officer (1)	2007	150,000							80,124								230,124

 

(1) Value of option awards is the dollar amount recognized for financial statements reporting purposes with respect for fiscal year 2008 and 2007 . See Note 11 to Consolidated Financial Statements.

 

PRINCIPAL STOCKHOLDERS

 

The table below sets forth information with respect to the beneficial ownership of our common stock as of January 8, 2010 for (i) persons who own more than 5% of our outstanding common stock; (ii) each of our directors or those nominated to be directors, and executive officers; and (iii) all of our directors and executive officers as a group.

Name and Address		Amount and Nature of				Percentage
of Beneficial Owner		Beneficial Ownership				of Class(1)
Fred Nazem 44 East 73rd Street New York, NY 10021			23,279,527	(2)			24.0	%
Faisal Syed 12 Kings Brook Court Mendham, NJ 07945			13,238,462				13.6	%
Mohamed Asif 53 Burnet Hill Road Livingston, NJ 07039			13,238,462				13.6	%
Fahad Syed c/o NetFabric Holdings, Inc 299 Cherry Hill Road Parsippany, NJ 07054			6,731,731				9.6	%
Jeff Robinson Five Tomaselli Court Ballston Spa, NY 12020			4,832,476				5.0	%
Vasan Thatham c/o NetFabric Holdings, Inc. 299 Cherry Hill Road Parsippany, NJ 07054			300,000	(3)			*
Charlotte G. Denenberg c/o NetFabric Holdings, Inc. 299 Cherry Hill Road Parsippany, NJ 07054			125,000	(4)			*
Joseph Perno c/o NetFabric Holdings, Inc. 299 Cherry Hill Road Parsippany, NJ 07054			125,000	(4)			*
Laurus Master Fund, Ltd. c/o Laurus Capital Management, LLC 335 Madison Avenue New York, NY 10017			5,221,393	(5)			5.3	%
All Directors and Executive Officers as a Group (4 persons)			7,281,731	(6)			7.5	%

 

* Less than 1%.

(1) Applicable percentage of ownership is based on 97,053,044 shares of common stock outstanding as of December 8, 2009 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting of investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of January 8, 2010 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such persons, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

(2) Includes 6,592,212 shares held by the Fred F. Nazem Children's Trust, whose trustees are Alexander Nazem, Farhad Nazem and Sohelya Gharib. Fred Nazem disclaims beneficial ownership of these securities.

 

(3) Includes 300,000 shares issuable upon exercise of options.

 

(4) Includes 125,000 shares issuable upon exercise of options.

 

 (5) Includes  554,282 shares issuable upon exercise of warrants.  Laurus Capital Management, LLC manages Laurus Master Fund Ltd. Eugene Grin and David Grin, through other entities, are the controlling principals of Laurus Capital Management, LLC and share sole voting and investment power over the securities owned by Laurus Master Fund Ltd.

 

(6) Includes 550,000 shares issuable upon exercise of options.

 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

In April 2006, we sold the 2006 Convertible Debentures in the face amount of $150,000 to Fahad Syed, an officer and director and in the face amount of $50,000 to Fred Nazem, a stockholder (For the purposes of this paragraph, Mr. Syed and Mr. Nazem are collectively referred to as the "Debenture Holders"). The 2006 Convertible Debentures bear interest at 8% and were due originally on June 17, 2006. At the option of the Debenture Holders, the 2006 Convertible Debentures can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, we issued warrants to the two Debenture Holders for an aggregate amount of 150,000 shares of the Company's common stock as additional consideration. In December 2006, the Debenture Holders extended the maturity of the 2006 Convertible Debentures to April 2007. In April 2007, the maturity of Convertible Debenture due to Fahad Syed was extended to December 2007 and repaid in 2008.

 

In June 2006, we sold a Stockholder Convertible Debenture in the face amount of $150,000 to Fred Nazem. The Stockholder Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the option of the holder, the Stockholder Convertible Debenture can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, we issued 300,000 shares of its common stock as additional consideration. In December 2006, Fred Nazem extended the maturity of the Stockholder Convertible Debenture to April 2007. In August 2007, the Company entered into an Agreement to Convert (the “Agreement”) with Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to convert $218,882 due to him in outstanding convertible debentures and accrued interest of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394 shares as an inducement for conversion.

 

We had a sublease with UCA Global, Inc., an entity affiliated with Faisal Syed, a stockholder . The lease is for an office of 13,000 square feet for a three year term through July 2008 with an annual rent of $144,000. The sublease rent was determined by the landlord based on the area of usage and we pay our share of rent directly to the landlord. Pursuant to entering into a lease for a new office premises, the Company has terminated the sublease arrangement effective June 2007.

 

In the normal course of business, the Company performed services for and billed Clear to Close, Inc., an entity affiliated with the Company's stockholders, in the amounts of $0 and $0, respectively, during the years ended December 31, 2008 and 2007. As of December 31, 2007, approximately $235,000 was owed to the Company by Clear to Close, Inc. including amounts owed to UCA prior to the acquisition and a full allowance is provided due to uncertainty over the recovery of the amount.

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Through September 30, 2005, Goldstein Golub Kessler LLP ( "GGK") had a continuing relationship with American Express Tax and Business Services Inc. ("TBS") from which it leased auditing staff who were full time, permanent employees of TBS and through which its partners provided non-audit services. Subsequent to September 30, 2005 this relationship ceased and GGK established a similar relationship with RSM McGladrey, Inc. GGK has no full time employees, and, therefore, none of the audit services performed were provided by permanent, full-time employees of GGK. GGK manages and supervises the audit and audit staff and is exclusively responsible for the opinion rendered in connection with its examination. GGK performed an audit of our annual financial statements for the year ended December 31, 2006.

 

Certain of the partners of GGK became partners of McGladrey & Pullen, LLP in a limited asset purchase agreement effective October 3, 2007. As a result, GGK resigned as our auditors effective December 4, 2007 and McGladrey & Pullen, LLP was appointed as the auditors of our annual financial statements for the year ended December 31, 2007.

 

Audit Fees

 

The aggregate fees billed or to be billed for professional services rendered by our independent registered public accounting firm for the audit of our annual financial statements, review of financial statements included in our quarterly reports and other fees that are normally provided by the accounting firm in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2008 and 2007 were $106,000 and $170,000, respectively. For 2007, 125,000 of fees was billed by McGladrey & Pullen, LLP and $45,000 was billed by GGK.

 

Audit Related Fees

 

The aggregate fees billed or to be billed for audit related services by our independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements, other than those previously reported in this Item 14, for the fiscal years ended December 31, 2008 and 2007 were $0 and $0, respectively.

 

 

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Tax Fees

 

The aggregate fees billed for professional services rendered by our independent registered public accounting firm for tax compliance, tax advice and tax planning for the fiscal years ended December 31, 2008 and 2007 were $0 and $0, respectively.

 

All Other Fees

 

There were no other fees billed for services by our independent registered public accounting firm for either audit related or non audit services for the fiscal years ended December 31, 2008 and 2007.

 

The Audit Committee considered and determined that the services performed are compatible with maintaining the independence of the independent registered public accounting firm.

 

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditor

 

The Audit Committee is responsible for pre-approving all audit and permitted non-audit services to be performed for us by our Independent Registered Public Accounting Firm as outlined in its Audit Committee charter. Prior to engagement of the Independent Registered Public Accounting Firm for each year's audit, management or the Independent Registered Public Accounting Firm submits to the Audit Committee for approval an aggregate request of services expected to be rendered during the year, which the Audit Committee pre-approves. During the year, circumstances may arise when it may become necessary to engage the Independent Registered Public Accounting Firm for additional services not contemplated in the original pre-approval. In those circumstances, the Audit Committee requires specific pre-approval before engaging the Independent Registered Public Accounting Firm. Currently, the Company does not have an audit committee and in accordance with ss.3(a)(58)(B) of the Securities Exchange Act of 1934, the entire Board of Directors is acting as the Company's Audit Committee. The entire Board of Directors does not delegate to management its responsibility to pre-approve services performed by the Independent Registered Public Accounting Firm.

 

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ITEM 15. EXHIBITS.

		A. Exhibits
Exhibit 2.1		Share Exchange Agreement between the Company, NetFabric, NetFabric's shareholders and Littlehampton LLC, dated December 9, 2004. (1)
Exhibit 2.2		Share Exchange Agreement between the Company, UCA Services, Inc. and all of the Shareholders of UCA Services, Inc. dated 20, 2005. (4)
Exhibit 3.1		Articles of Incorporation (12)
Exhibit 3.2		By-Laws. (7)
Exhibit 10.1		Letter Agreement between Houston Operating Company, NetFabric Corporation, Macrocom Investors, LLC and Littlehampton Investments, LLC, dated March 25, 2005. (3)
Exhibit 10.2		Financing Agreement between NetFabric and Macrocom, dated July 22, 2004. (1)
Exhibit 10.3		Loan Agreement between NetFabric and Macrocom, dated October 14, 2004. (1)
Exhibit 10.4		Amendment to Financing and Loan Agreement between NetFabric and Macrocom, dated December 2, 2004. (1)
Exhibit 10.5		Distribution Agreement between NetFabric and Williams, dated November 29, 2004. (1)
Exhibit 10.6		Lease Agreement between NetFabric and Silvermine, dated January 1, 2004. (1)
Exhibit 10.7		2005 Stock Option Plan. (2)
Exhibit 10.8		Agreement with Macrocom Investors, LLC for Convertible Debentures dated July 19, 2005. (5)
Exhibit 10.9		Warrant, dated as October 27, 2005, issued by the Company to Cornell Capital Partners, LP. (6)
Exhibit 10.10		Securities Purchase Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)
Exhibit 10.11		Investor Registration Rights Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)

 

 

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Exhibit 10.12		Escrow Agreement, dated as of October 27, 2005, by and among the Company, Cornell Capital Partners, LP and David Gonzalez, Esq., as escrow agent pursuant to the Securities Purchase Agreement. (6)
Exhibit 10.13		Amended and Restated Security Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)
Exhibit 10.14		Amended and Restated Security Agreement, dated as of October 27, 2005, by and between the Company and Cornell Capital Partners, LP. (6)
Exhibit 10.15		Amended and Restated Security Agreement, dated as of October 27, 2005, by and between UCA Services, Inc. and Cornell Capital Partners, LP. (6)
Exhibit 10.16		Officer Pledge and Escrow Agreement, dated as of October 27, 2005, by and among the Company, Cornell Capital Partners, LP and David Gonzalez, Esq., as escrow agent. (6)
Exhibit 10.17		Form of Secured Convertible Debenture issued to Cornell Capital Partners, LP dated October 27, 2005. (6)
Exhibit 10.18		Employment Agreement with Fahad Syed. (7)
Exhibit 10.19		Amendment of The Share Exchange Agreement dated February 13, 2006 by and among NetFabric, Holdings, Inc. UCA Services, Inc. and UCA Shareholders. (8)
Exhibit 10.20		Security Agreement, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd.
Exhibit 10.21		Secured Convertible Note, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd. (9)
Exhibit 10.22		Secured Non-Convertible Note, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd. (9)
Exhibit 10.22		Option, dated February 10, 2006, by the Company. (9)
Exhibit 10.23		Registration Rights Agreement, dated February 10, 2006, by and between the Company and Laurus Master Fund, Ltd. (9)
Exhibit 10.24		Subsidiary Guaranty, dated February 10, 2006 from NetFabric Corporation and UCA Services, Inc. (9)
Exhibit 10.25		Letter agreement, dated February 10, 2006 between the Company and Laurus Master Fund. (9)
Exhibit 10.27		Form of Convertible Debenture dated April 19, 2006 issued by the Company. (10)
Exhibit 10.28		Form of Warrant, dated April 19, 2006 issued by the Company. (10)
Exhibit 10.28		Agreement and Plan of Acquisition by and between Intrusion Detection Technologies, Inc., UTEK Corporation and NetFabric Holdings, Inc. (11)
Exhibit 14.1		Code of Business Conduct and Ethics. (3)
Exhibit 21.1		Subsidiaries of the Registrant*
Exhibit 31.1		Rule 13a-14(a)/15d-14(a) Certification (CEO)*
Exhibit 31.2		Rule 13a-14(a)/15d-14(a) Certification (CFO)*
Exhibit 32.1		Section 1350 Certification (CEO)*
Exhibit 32.2		Section 1350 Certification (CFO)*

 

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* Filed herewith.

 

(1) Filed as an Exhibit to the Company's 8-K filed on December 15, 2004.

 

(2) Filed with Schedule 14C Information on March 21, 2005.

 

(3) Filed as an Exhibit to the Company's 10K/A filed on December 19, 2005.

 

(4) Filed as an Exhibit to the Company's Form 8-K on May 26, 2005

 

(5) Filed as an Exhibit on the Company's 8-K filed on July 25, 2006.

 

(6) Filed as an Exhibit on the Company's SB-2 on November 2, 2005

 

(7) Filed as an Exhibit on the Company's 10KSB filed on April 15, 2006

 

(8) Filed as an Exhibit to the Company's Form 8_8K filed on February 15, 2006

 

(9) Filed as an Exhibit to the Company's Form 8-K filed on February 15, 2006

 

(10) Filed as an Exhibit to the Company's Form 8-K filed on April 19, 2006

 

(11) Filed as an Exhibit to the Company's Form 8-K filed on August 16, 2006

 

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 18,2010	/s/ FAHAD SYED
	Fahad Syed, Chairman and
	Chief Executive Officer
	(principal executive officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: February 18,2010	/s/ FAHAD SYED
	Fahad Syed, Chairman
	and Chief Executive Officer
	(principal executive officer)
Date: February 18,2010	/s/ VASAN THATHAM
	Vasan Thatham, Chief Financial
	Officer (principal accounting officer)
Date: February 18,2010	/s/ JOSEPH PERNO
	Joseph Perno, Director
Date: February 18,2010	/s/ CHARLOTTE G. DENENBERG
	Charlotte G. Denenberg, Director

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

NetFabric Holdings, Inc.

 

We have audited the accompanying consolidated balance sheets of NetFabric Holdings, Inc. and Subsidiaries (hereafter referred to as “NetFabric”) as of December 31, 2008 and 2007, and the related statements of operations, stockholders' equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NetFabric as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has had net losses from inception and has a working capital deficiency. These matters raise substantial doubt about its ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As disclosed in note 14 to the consolidated financial statements, subsequent to December 31, 2008 the Company was involved in a financing transaction.

 

McGLADREY & PULLEN, LLP

 

New York, New York

 

May 11, 2009

 

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		DECEMBER 31, 2008				DECEMBER 31, 2007
ASSETS
CURRENT ASSETS:
Cash		$	1,317,510			$	15,224
Trade accounts receivable, net			3,027,795				1,758,821
Prepaid expenses and other current assets			151,595				34,012
Total current assets			4,496,900				1,808,057
Property and equipment, net			132,337				206,329
Goodwill			5,704,000				5,704,000
Other intangibles, net			456,564				659,687
Other assets			22,921				22,929
TOTAL ASSETS		$	10,812,722			$	8,401,002
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Convertible debentures, net of unamortized discounts						$	150,000
Short term borrowings		$	950,000				970,000
Accounts payable and accrued liabilities			4,697,074				3,976,771
Accrued compensation			612,526				554,880
Deferred revenues and customer advances			1,622,227				112,000
Convertible note, net of unamortized discount			1,443,144
Revolving note, net of unamortized discount			1,384,257				981,555
Total current liabilities			10,709,228				6,745,206
Convertible note, net of unamortized discount							940,232
Total liabilities			10,709,228				7,685,438
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY :
Common Stock, $.001 par value, authorized shares 200,000,000, 97,053,044 and 96,053,044 shares issued and outstanding, respectively			97,053				96,053
Additional paid-in capital			38,110,162				37,802,940
Accumulated deficit			(38,103,721	)			(37,183,429	)
Total stockholders' equity			103,494				715,564
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	10,812,722			$	8,401,002

See accompanying notes to consolidated financial statements.

 

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

		Year				Year
		Ended				Ended
		December 31, 2008				December 31, 2007
Revenues		$	24,229,023			$	16,223,871
OPERATING EXPENSES:
Direct employee compensation and
consultant expenses ( includes share based compensation
of $34,598 and $45,584)			19,071,378				12,528,503
Selling, general and administrative expenses (includes
share based compensation of $233,624 and $300,313)			4,026,688				4,962,997
Impairment of goodwill							8,278,451
Depreciation and amortization			287,422				316,938
Total operating expenses			23,385,488				26,086,889
Income (loss) from operations			843,535				(9,863,018	)
OTHER INCOME / (EXPENSE):
Amortization of debt discounts			(763,300	)			(758,011	)
Amortization of debt issuance costs			(627,873	)			(282,005	)
Interest and bank charges			(372,654	)			(315,135	)
Debt inducement costs							(539,043	)
Total other income / (expense)			(1,763,827	)			(1,894,194	)
Loss before provision for income taxes			(920,292	)			(11,757,212	)
Provision for income taxes			-				-
LOSS FROM CONTINUING OPERATIONS			(920,292	)			(11,757,212	)
DISCONTINUED OPERATIONS:
Loss from  discontinued operations			-				(53,398	)
NET LOSS		$	(920,292	)		$	(11,810,610	)
Net loss from continuing operations per common share, basic and diluted		$	(0.01	)		$	(0.14	)
Net loss from discontinued operations per common share, basic and diluted			-				-
Net loss per common share, basic and diluted		$	(0.01	)		$	(0.14	)
Weighted average number of shares outstanding, basic and diluted			96,837,197				81,617,063

See accompanying notes to consolidated financial statements.

 

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NETFABRIC HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

		COMMON STOCK								ADDITIONAL				ACCUMULATED				TOTAL
		SHARES				PAR VALUE				PAID-IN CAPITAL				DEFICIT				STOCKHOLDERS' EQUITY
Balances at December 31, 2006			75,023,883			$	75,024			$	36,201,479			$	(25,372,819	)		$	10,903,684
Issuance of common shares for services			640,000				640				76,960								77,600
Sale of common shares in private placement			11,250,000				11,250				438,750								450,000
Employee share-based compensation											268,297								268,297
Conversion of warrants to common shares			3,667,111				3,667				(3,667	)
Allocation of value for warrants issued in connection with short term borrowings											68,668								68,668
Conversion of convertible debenture issued to shareholder with common stock			5,472,050				5,472				752,453								757,925
Net loss															(11,810,610	)			(11,810,610	)
Balances at  December 31, 2007			96,053,044				96,053				37,802,940				(37,183,429	)			715,564
Issuance of common shares for finance charges			1,000,000				1,000				39,000								40,000
Employee share-based compensation											268,222								268,222
Net loss															(920,292	)			(920,292	)
Balances at  December 31, 2008			97,053,044			$	97,053			$	38,110,162			$	(38,103,721	)		$	103,494

See accompanying notes to consolidated financial statements.

 

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NETFABRIC HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

		Year ended				Year ended
		December 31, 2008				December 31, 2007
OPERATING ACTIVITIES
Net loss			(920,292	)			(11,810,610	)
Loss from discontinued operations							53,398
Adjustments to reconcile net loss to net cash  provided by (used in)  operating activities:
Common stock, options and warrants issued for services							77,600
Share based compensation			268,222				268,297
Debt inducement charge							539,043
Non-cash financing fees			40,000
Amortization of debt discounts			763,300				758,011
Amortization of debt issuance costs			627,873				282,005
Impairment of goodwill							8,278,451
Depreciation and amortization			287,422				316,938
Loss on disposal of property and equipment			5,287
Changes in operating assets and liabilities:
Trade accounts receivable			(1,268,974	)			390,859
Prepaid expenses and other current assets			(117,583	)			(28,902	)
Other assets							31,502
Accounts payable and accrued liabilities			719,498				248,428
Accrued compensation			57,646				216,597
Deferred revenues and advances			1,510,227				112,000
Net cash provided by continuing operations			1,972,626				(266,383	)
Net cash used in discontinued operations							(53,398	)
Net cash provided by (used in) operating activities			1,972,626				(319,781	)
INVESTING ACTIVITIES
Proceeds from disposal of property and equipment			5,981
Purchases of property and equipment			(20,762	)			(106,024	)
Net cash used in investing activities			(14,781	)			(106,024	)
FINANCING ACTIVITIES
Proceed from a private sale of common stock							450,000
Repayment of debentures			(150,000	)			(500,000	)
Short term borrowings			1,110,000				1,170,000
Repayment of short term borrowings			(1,130,000	)			(200,000	)
Repayment of convertible debentures
Proceeds from issuance (repayment) of revolving note, net			142,314				(210,403	)
Debt issuance costs			(627,873	)			(282,005	)
Net cash (used in) provided by financing activities			(655,559	)			427,592
Net increase in cash			1,302,286				1,787
Cash at beginning of period			15,224				13,437
Cash at end of period		$	1,317,510			$	15,224
Supplemental cash flow information:
Cash paid for interest		$	347,000			$	322,000
Supplemental non-cash financing information
Conversion of convertible debenture issued to stockholder and officer with common stock						$	757,925
Warrants issued with debt arrangements						$	68,668

See accompanying notes to consolidated financial statements.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

NOTE 1. NATURE OF BUSINESS AND MANAGEMENT'S PLANS

 

NetFabric Holdings, Inc. ("Holdings" or the "Company") (formerly known as Houston Operating Company) was incorporated under the laws of the State of Delaware on August 31, 1989. On December 9, 2004, Holdings entered into an Exchange Agreement (the "Acquisition Agreement" or "Share Exchange") with all of the stockholders of NetFabric Corporation ("NetFabric") whereby Holdings acquired all of the issued and outstanding capital stock of NetFabric and NetFabric became a wholly-owned subsidiary of Holdings. Upon completion of the merger, the NetFabric stockholders controlled approximately 95% of the then issued and outstanding stock. NetFabric's business activities were the activities of the merged company and Holdings was a shell corporation without any operations. As a result of these factors, this transaction was treated as a reverse merger for financial reporting purposes

 

NetFabric, a Delaware corporation incorporated on December 17, 2002, began operations in July 2003. NetFabric developed and marketed Voice Over Internet Protocol ("VoIP") appliances that simplified the integration of standard telephone systems with an IP infrastructure. On May 5, 2006, the Company announced its decision to exit from the hardware-based VoIP communications product line (including resale of transport services) that is targeted at small to mid-sized businesses ("SMB's"). In accordance with Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144"), the Company has presented the results of operations from its VoIP business segment as discontinued operations in the accompanying consolidated balance sheets, statements of operations and statements of cash flows (Note 3).

On May 20, 2005, Holdings entered into and closed on a share exchange agreement ("Exchange Agreement"), whereby Holdings acquired all of the issued and outstanding shares of UCA Services, Inc. ("UCA Services"), a New Jersey company, from its shareholders in exchange for the issuance of 24,096,154 shares of common stock of Holdings. Holdings emerged from the development stage upon the acquisition of UCA Services.  In May 2007, UCA Services changed its legal name to NetFabric Technologies, Inc.

 

UCA Services, a New Jersey company, is an information technology ("IT") services company that serves the information and communications needs of a wide range of Fortune 500 and small to mid-size business clients in the financial markets industry as well as the pharmaceutical, health care and hospitality sectors. UCA Services delivers a broad range of IT services in the practice areas of infrastructure builds and maintenance, managed services and professional services.

 

Management's plans

 

The accompanying consolidated financial statements have been prepared on a going concern basis. As shown in the accompanying consolidated financial statements, the Company has incurred accumulated losses totaling $38,103,721 and has a working capital deficit of $6,212,328 at December 31, 2008. These factors, among others, indicate that the Company may be unable to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Management recognizes that the Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow the Company to continue the development of its business plans and satisfy its current and long-term obligations on a timely basis. The Company believes that it will be able to complete the necessary steps in order to meet its cash requirements throughout fiscal 2009 and continue its business development efforts.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

In March 2009, the company entered into a transaction with Fortify Infrastructure Services, Inc. See Note 16. Pursuant the transaction, the Company will transfer its ownership interest in UCA Services. Out of proceeds from the transaction, the Company repaid all of its debt.  After the eventual divesture of UCA, the Company will not have any operations. However, the Company will be debt free. The Company will explore strategic alternatives including merger with another entity. Currently, the Company does not have any agreement or understanding with any entity and there is no assurance that such a transaction will ever be consummated.

 

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

 

Basis of Presentation of Consolidated Financial Statements and Estimates

 

The consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The accounting estimates that require management's most difficult and subjective judgments include the value and allocation of purchase price in business combinations, provisions for bad debts, depreciable/amortizable lives, impairment of goodwill and other long-lived assets, the fair value of common stock and options issued for services as well as the allocation of proceeds from the bridge loan to and financial instruments and other reserves. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

 

Revenue Recognition

 

In accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition," revenue is recognized when persuasive evidence of an arrangement exists, delivery of the product or services has occurred, the fee is fixed and determinable, collectability is reasonably assured, contractual obligations have been satisfied, and title and risk of loss have been transferred to the customer.

 

The Company derives revenue primarily from professional services, managed IT services, application development services and from business process management services. Arrangements with customers for services are generally on a time and material basis or fixed-price, fixed-timeframe. Revenue on time-and-material contracts is recognized as the related services are performed. Revenue from fixed-price, fixed-timeframe service contracts is recognized ratably over the term of the contract. When the Company receives cash advances from customers in advance of the service period, amounts are reported as advances from customers until the commencement of the service period.

 

Billings and collections in excess of revenue recognized are classified as deferred revenue.

 

Allowance for Doubtful Accounts

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. These estimated losses are based upon historical bad debts, specific customer creditworthiness and current economic trends. If the financial condition of a customer deteriorates, resulting in the customer's inability to make payments within approved credit terms, additional allowances may be required. The Company performs credit evaluations of its customers' financial condition on a regular basis, and has not experienced any material bad debt losses to date. The Company recorded allowances for bad debts of $32,609 and $24,623 during years ended December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007, the doubtful allowance balances were $43,300 and $297,946, respectively.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Cash and Cash Equivalents

 

 

Property and Equipment

 

Property and equipment, consisting principally of computer equipment and furniture and fixtures, are recorded at cost. Depreciation and amortization are provided for on a straight line basis over the following useful lives:

Equipment	3 years
Furniture and fixtures	7 years
Leasehold improvements	Lesser of life of lease or useful life

 

Repairs and maintenance are charged to operations as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from the accounts and any resulting gain or loss is reported in the period realized.

 

Long-Lived Assets

 

Long-lived assets, including property and equipment and intangible assets with finite lives, are monitored and reviewed for impairment in value whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The determination of recoverability is based on an estimate of undiscounted cash flows expected to result from the use of an asset and its eventual disposition. The estimated cash flows are based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. Estimates of undiscounted cash flows may differ from actual cash flows due to factors such as technological changes, economic conditions, and changes in the Company's business model or operating performance. If the sum of the undiscounted cash flows (excluding interest) is below the carrying value, an impairment loss is recognized, measured as the amount by which the carrying value exceeds the fair value of the asset.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, such amounts may exceed Federally insured limits. The Company reduces credit risk related to accounts receivable by routinely assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts.

 

The Company's services have been provided primarily to a limited number of clients located in a variety of industries. During the year ended December 31, 2008, the Company had revenues from 2 clients representing 63% (49% and 14%, respectively) of the revenues during the year. The Company had revenues from 2 clients representing 49% (39% and 10%, respectively) of revenues during the year ended December 31, 2007.

 

The Company generally does not require its clients to provide collateral. Additionally, the Company is subject to a concentration of credit risk with respect to its accounts receivable. The Company had 3 clients accounting for 74% (41%, 23% and 10%, respectively) of total gross accounts receivable as of December 31, 2008. At December 31, 2007, the Company had 3 clients accounting for 68.3% (41%, 14.7% and 12.6%, respectively) of total gross accounts receivable.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Goodwill

 

Goodwill represents the Company's allocation of the cost to acquire UCA Services in excess of the fair value of net assets acquired. The purchase price and its allocation, to reflect the fair values of assets acquired and liabilities assumed, have been based upon management's evaluation using accepted valuation methodologies.

 

Under SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), goodwill is not amortized but is reviewed for impairment annually. The Company performs its annual goodwill impairment testing, by reporting units, in the second quarter of each year, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. Application of the goodwill impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for UCA Services, period over which cash flows will occur, and determination of UCA Services cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill impairment for UCA Services. Goodwill at December 31, 2008 and 2007 was $5,704,000.

 

Intangibles

 

Intangible assets are accounted for under the provisions of SFAS No. 142. Intangible assets arise from business combinations and consist of customer relationships and restricted covenants related to employment agreements that are amortized, on a straight-line basis, over periods of up to six years. The Company follows the impairment provisions and disclosure requirements of SFAS No. 142. Accordingly intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets at December 31, 2008 and 2007 were $456,564 and  $659,687, respectively.

 

Fair Value of Financial Instruments

 

The fair values of the Company's assets and liabilities that qualify as financial instruments under statement of financial accounting standards ("SFAS") No. 107 approximate their carrying or principal amounts presented in the balance sheets at December 31, 2008 and 2007.

 

The Company has issued financial instruments which have required a determination of the fair value of certain related derivatives, where quoted market prices were not published or readily available at the date of issuance. The Company bases its fair value determinations on an evaluation of the facts and circumstances and valuation techniques that require judgments and estimates.

 

Share-Based Compensation Expense

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. SFAS 123(R) supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's consolidated statements of operations. Prior to the adoption of SFAS 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB 25 as allowed under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Under the intrinsic value method, stock-based compensation expense was recognized in the Company's consolidated statement of operations based on the difference between the exercise price of the Company's stock options granted to employees and directors, and the fair market value of the underlying stock at the date of grant.

 

Income Taxes

 

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized. The ultimate realization of deferred tax assets depends upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Effective January 1, 2007, the Company adopted FIN No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures.

 

As a result of the implementation of FIN 48, the Company performed a review of its portfolio of uncertain tax positions in accordance with recognition standards established by FIN 48. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. Based on its review, the Company concluded that there are no significant unrecognized tax positions requiring recognition in the Company’s financial statements. The Company does not believe there will be any material changes in our unrecognized tax positions over the next 12 months

The Company files federal income tax returns, as well as multiple state, local and foreign jurisdiction tax returns. The income tax returns are subject to examinations by tax authorities.

 

The Company’s policy is to recognize interest and penalties accrued as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any penalties or tax-related interest, and there was no tax- related interest or penalties recognized during the years ended  December 31, 2008 and 2007.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Earnings (Loss) Per Share

 

The Company calculates earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share." SFAS No. 128 computes basic earnings (loss) per share by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of common stock outstanding during the period plus the effects of any dilutive securities. Diluted earnings (loss) per share considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. The Company's potentially dilutive securities include common shares which may be issued upon exercise of its stock options, exercise of warrants or conversion of convertible debt.

 

Diluted loss per share for the years ended December 31, 2008 and 2007 exclude potentially issuable common shares of approximately 10,855,219 and 14,493,856 , respectively, primarily related to the Company's outstanding stock options, warrants and convertible debt, because the assumed issuance of such potential common shares is antidilutive.

 

SEGMENT REPORTING

 

The Company determines and discloses its segments in accordance with SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which uses a "management" approach for determining segments. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of a company's reportable segments. SFAS No. 131 also requires disclosures about products or services, geographic areas and major customers. In 2006, we discontinued VoIP segment and operate in one segment.

 

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," (“SFAS No. 157”), which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact SFAS No. 157 will have on our consolidated financial statements.

In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. (“FAS 159”) is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in FAS 159. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.

 

FAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparisons between entities that elect different measurement attributes for similar assets and liabilities. Management is currently evaluating the effect of this pronouncement on financial statements.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which replaces FASB Statement No. 141, “Business Combinations.” SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree, and the goodwill acquired. The Statement also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 141(R) on its consolidated financial position, results of operations, and cash flows.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of Accounting Research Bulletin No. 51,” which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated.  The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No.160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008 (our Fiscal 2010). The Company has not completed its evaluation of the potential impact, if any, of the adoption of SFAS No. 160 on our consolidated financial position, results of operations, and cash flows.

The Company does not believe that any other recently issued, but not effective, accounting standards, if currently adopted will have material effect on the Company’s consolidated financial position, results of operations and cash flows.

 

NOTE 3. DISCONTINUED OPERATIONS

 

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

NOTE 4. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net, consists of the following at December 31:

		2008				2007
Equipment		$	480,837			$	476,712
Lease improvements			106,907				106,907
Furniture and fixtures			127,955				123,554
			715,699				707,173
Less: Accumulated depreciation and amortization			(583,362	)			(500,844	)
		$	132,337			$	206,329

 

 

NOTE 5. INTANGIBLE ASSETS

 

The Company's intangible assets consisting of customer contacts and restricted covenants related to employment agreements were acquired and accounted for using the purchase method of accounting. The following table summarizes the net asset value for each intangible asset category as of December 31, 2008:

												Net
		Amortization		Gross Asset				Accumulated				Asset
		Period		Value				Amortization				Value
Customer relationship		6 years		$	1,153,424			$	(696,860	)		$	456,564
Covenants not to compete		3 years			83,333				(83,333	)			-
				$	1,236,757			$	(780,193	)		$	456,564

 

The following table summarizes the net asset value for each intangible asset category as of December 31, 2007:

												Net
		Amortization		Gross Asset				Accumulated				Asset
		Period		Value				Amortization				Value
Customer relationship		6 years		$	1,153,424			$	(504,623	)		$	648,801
Covenants not to compete		3 years			83,333				(72,447	)			10,886
				$	1,236,757			$	(577,070	)		$	659,687

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Amortization expense was $203,123 and  $220,015 for the years ended December 31, 2008 and 2007, respectively.

 

The Company did not have any intangible assets prior to the acquisition of UCA Services in May 2005.

 

2009			192,237
2010			192,237
2011			72,090
		$	456,564

 

NOTE 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consist of the following at December 31:

		2008				2007
Trade accounts payable		$	4,264,547			$	3,592,213
Accrued professional fees			245,000				316,592
Accrued interest and fees payable			187,527				67,966
		$	4,697,074			$	3,976,771

 

Accounts payable and accrued expenses related to discontinued operations approximate $132,000 and$153,000 at December 31, 2008 and 200, respectively.

NOTE 7. IMPAIRMENT OF GOODWILL

Goodwill represents the Company’s allocation of the cost to acquire UCA Services in excess of the fair value of net assets acquired. The purchase price and its allocation, to reflect the fair values of identifiable assets acquired and liabilities assumed, have been based on management’s evaluation using accepted valuation methodologies.

Pursuant to SFAS No. 142 “Goodwill and Other Intangibles Assets,” (“SFAS No. 142”), the Company performed its annual testing of goodwill impairment in the second quarter of 2007. As a part of goodwill impairment testing, management reviewed various factors, such as the market price of the Company’s common stock, discounted cash flows from projected earnings and values of comparable companies to determine whether impairment exists. Based on this evaluation it was determined that the goodwill was impaired.   The impairment was due to a continued decline in the Company’s market capitalization during the past year, and due to lower future cash flows expected to be generated by the business due to working capital constraints. The implied value of the goodwill was $10,585,000 compared to a carrying value of $13,982,451, indicating an impairment of $3,397,451. The impairment loss was charged to operations during the three months ended June 30, 2007.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Company evaluated its business conditions and future strategic direction including the delisting of its common shares from trading on the Bulletin Board (“OTCBB”) and concluded that an interim testing of goodwill is warranted at December 31, 2007. As a part of the interim goodwill impairment testing, management reviewed various factors and used a market approach (comparison of financial data for publicly traded companies engaged in similar lines of business) to determine whether impairment exists. Based on this evaluation, it was determined that the goodwill was impaired. The impairment was, in part, due to decreased values of comparable companies. The implied value of goodwill was $5,704,000 compared to carrying value of $10,585,000, indicating an impairment of $4,881,000. The additional impairment loss was charged to operations during the three months ended December 31, 2007. In total an impairment loss of $8,278,451 was charged to operations during the year ended December 31, 2007.

 

NOTE 8. DEBT FINANCINGS

Debt financings consist of the following as of December 31, 2008

						Unamortized
		Principal				debt discount				Net
Laurus Revolving Note Due in March 2009		$	1,419,263			$	(35,006	)		$	1,384,257
Laurus Convertible Note Due in March 2009			1,500,000				(56,856	)			1,443,144
Short term borrowings			950,000								950,000
		$	3,869,263			$	(91,862	)		$	3,777,401

Debt financings consist of the following as of December 31, 2007

						Unamortized
		Principal				debt discount				Net
Laurus Revolving Note Due in March 2009		$	1,276,949			$	(295,394	)		$	981,555
Laurus Convertible Note Due in March  2009			1,500,000				(559,768	)			940,232
2006 Convertible Debentures, due in December 2007			150,000								150,000
Short Term Borrowings including $50,000 from an officer
and director			970,000								970,000
		$	3,896,949			$	(855,162	)		$	3,041,787

 

Laurus Convertible and Non Convertible Financings

 

On February 14, 2006, the Company entered into a Security Agreement, dated February 10, 2006 with Laurus Master Fund, Ltd ("Laurus"). Under the Security Agreement, Laurus purchased from the Company a Secured Convertible Note from the Company with a maturity date of February 10, 2009 (the "Laurus Convertible Note") in the aggregate principal amount of $1,500,000 and a Secured Non-Convertible Revolving Note ("Laurus Revolving Note"), in the aggregate principal amount of $1,500,000. The Laurus Convertible Note and the Laurus Revolving Note are collectively the "Laurus Notes". In 2009, the maturity date was extended to March 31, 2009. See Note 15.The Company's ability to receive financing under the Laurus Notes is based on an advance rate equal to 90% of eligible accounts receivable, as defined.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

However, Laurus has agreed to provide the Company an over advance until July 30, 2007 and the overadvance feature was extended in 2007. Through December 31, 2007 $1,500,000 was advanced for the Laurus Convertible Note and $1,276,949 was outstanding for the Laurus Revolving Note. The Laurus Convertible Note has a three-year term, and bears interest at 1% above the prime rate, with a minimum interest rate of 8%. Laurus has the option, at any time until February 9, 2009 to convert all or any portion of the Laurus Convertible Note and accrued interest into shares of the Company's common stock at a conversion price of $0.91 per share. The Company has the option, to repay the Laurus Convertible Note by paying Laurus the principal amount, accrued interest and a certain redemption premium, as defined.

 

The Laurus Revolving Note has a three-year term and bears interest at 1% above the prime rate, with a minimum interest rate of 8%.

 

In connection with the Laurus Notes, the Company issued to Laurus an option (the "Laurus Option") to purchase up to 4,256,550 shares of the Company's common stock at an exercise price of $0.001 per share. Additionally, the Company and Laurus entered into a registration rights agreement (the " Laurus Registration Rights Agreement") covering the registration of common stock underlying the Laurus Convertible Note and the Laurus Option.

 

The Company's obligations under the Laurus Notes are secured by first liens on all assets of the Company, and Laurus may accelerate all obligations under the Laurus Notes upon an event of default.

The Company allocated the $1,500,000 of proceeds from the Laurus Convertible Note based on the computed relative fair values of the debt and stock instruments issued. The Laurus Options were valued using a Black-Scholes option-pricing model with the following assumptions: (1) common stock fair value of $0.95 per share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of 10 years and (5) no dividend, which resulted in a fair value of $2,569,546 for the Laurus Options. The resulting relative fair value of the Laurus Options was $918,923. Accordingly, the resulting relative fair value allocated to the debt component of $511,577 was used to measure the intrinsic value of the embedded conversion option of $1,054,357 which resulted in a beneficial conversion feature of $511,577 recorded to additional paid-in capital. The aggregate amounts allocated to the Laurus Options and beneficial conversion feature, of $1,430,500 were recorded as a debt discount at the date of issuance of the Laurus Convertible Notes and are being amortized to interest expense using the interest method over the three-year term. For the years ended December 31, 2008 and 2007, $502,912 and $499,544, respectively, of debt discount was accreted and recorded as amortization of debt discounts.

 

The Company allocated the $1,028,000 of proceeds from the Laurus Revolving Note based on the computed relative fair values of the debt and Laurus Options. The Laurus Options were valued using a Black-Scholes option-pricing model with the following assumptions: (1) common stock fair value of $0.95 per share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.59%, (4) life of 10 years and (5) no dividend, which resulted in a fair value of $1,471,494 for the options. The resulting relative fair value of the Laurus Options was $513,820. Accordingly, the resulting relative fair value allocated to the debt component was $275,680. The aggregate amount allocated to the options of $513,820 was recorded as a debt discount at the date of issuance of the Laurus Notes and are being amortized to interest expense using the interest method three-year term. For the year ended December 31, 2008 and 2007, $260,388 and $177,709, respectively, of debt discount was accreted and recorded as amortization of debt discounts.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Transaction fees of $139,000 paid to Laurus and its affiliates in connection with the Laurus Notes were netted against the proceeds and considered in the calculation of the beneficial conversion feature and accreted over the term of notes. Financing costs of $20,696 paid to third parties associated with the Laurus Notes are included as debt issuance costs in other assets and amortized over the term of the debt.

 

The Company utilized approximately $1.9 million of the initial borrowing from Laurus to repay all amounts owed under all amounts owed pursuant a debenture.

In October 2007, the Company and Laurus entered into an extensions agreement (the “Extension Agreement’). The Extension Agreement provides for the extension of the over advance feature until February 2009. However, the over advance amount will reduce by $5,000 each month from November 2007 to February 2008 and by $50,000 each month starting March of 2008.  The Company paid $15,000 fees to Laurus for the extension and the amount was charged to operations as amortization of debt issuance cost during the year ended December 31, 2007.

In 2008, the Company and Laurus entered into two waiver/ amendment agreements, pursuant to which Laurus waived the Company’s non compliance of certain terms of the Security Agreement including the Company’s decision to stop periodic filing reports with the Securities and Exchange Commission. In exchange for the waivers the Company issued Laurus 1,000,000 shares of its common stock. In addition, the Company agreed to pay Laurus additional interest of 3.5% on the outstanding loan balance from June 1, 2008. The additional interest will be payable to Laurus upon maturity of the credit facility in March 2009.

 

2006 Convertible Debentures

 

In 2006, the Company sold eight Convertible Debentures (the " 2006 Convertible Debentures") in the face amount of $800,000 to six individuals (the "Debenture Holders" or a "Debenture Holder") including $150,000 face value to an officer and director, and $50,000 face value to a stockholder of the Company. The 2006 Convertible Debentures bear interest at 8% and were for a term of three months. At the option of the Debenture Holders, the 2006 Convertible Debentures can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, the Company issued warrants to three Debenture Holders to acquire an aggregate of 750,000 shares of its common stock with a nominal exercise price. The warrants expire in three years from the date of issuance. The remaining three Debenture Holders received an aggregate of 225,000 shares of the Company's common stock as additional consideration.

The Company used part of the proceeds from the sale of the 2006 Debentures to repay $500,000 due to the Macrocom Investors, LLC ("Macrocom") pursuant to a debenture issued in July of 2005.

 

The Company allocated the $800,000 of proceeds received from the 2006 Convertible Debentures to debt, warrants and stock instruments issued based on the then computed relative fair values. The fair value of the shares issued was $168,750 which resulted in a relative fair value of $103,271. The warrants issued were valued using a Black-Scholes option-pricing model with the following assumptions: (1) common stock fair value of $0.75 per share (2) expected volatility of 71.26%, (3) risk-free interest rate of 4.86%, (4) life of 3 years and (5) no dividend, which resulted in a fair value of $198,901 and a relative fair value of $133,969. Additionally, the resulting relative fair value allocated to the debt component was used to measure the intrinsic value of the embedded conversion option of the 2006 Convertible Debentures which resulted in a beneficial conversion feature with a fair value of $444,010. The relative fair value of $305,990 was recorded to additional paid-in capital. The value of the beneficial conversion feature was limited to the amount of the proceeds allocated to the debt component of the 2006 Convertible Debentures. The aggregate amounts allocated to the warrants, stock instruments and beneficial conversion feature, of $543,220 were recorded as a debt discount at the date of issuance of the 2006 Convertible Debentures and were amortized to interest expense using the interest method over the originally stated term of the 2006 Convertible Debentures. During the year ended December 31, 2007, $14,823 of discount was accreted and recorded as amortization of debt discounts and debt issuance costs included in the accompanying consolidated statements of operations.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The Company repaid one 2006 Convertible Debenture in the face amount of $100,000. The Company and the Debenture holders agreed to extension of the term of duration by months on two occasions in 2006.

 

In January and February of 2007, the Company repaid five of the seven 2006 Convertible Debentures in the aggregate face amount of $500,000. In December 2006, the Company and the officer and director and the stockholders agreed to extend the term of two of 2006 Convertible Debentures in the face amount of $200,000 to April 30, 2007. The term of the Convertible Debenture due to the officer and director was extended to December 31, 2007 and was repaid in 2008. In August 2007, the Company and the stockholder entered into an agreement to convert $50,000 face amount of 2006 Convertible Debentures into shares of the Company’s common stock as described below.

 

Stockholder Convertible Debenture

 

On June 8, 2006, the Company sold a Convertible Debenture in the face amount of $150,000 to a stockholder (the "Stockholder Convertible Debenture"). The Stockholder Convertible Debenture bears interest at 8% and was due on August 4, 2006. At the option of the holder, the Stockholder Convertible Debenture can be converted into shares of the Company's common stock at a conversion price of $.50 per share. In connection with the sale, the Company issued 300,000 shares of its common stock as additional consideration.

 

The Company allocated the $150,000 of proceeds received from the Stockholder Convertible Debenture based on the computed relative fair values of the debt and stock instruments issued. The fair value of the common stock issued was $105,000 which resulted in a relative fair value of $61,764. Additionally, the resulting relative fair value allocated to the debt component was used to measure the intrinsic value of the embedded conversion option of the Stockholder Convertible Debenture which resulted in a beneficial conversion feature of $16,765 recorded to additional paid-in capital. The aggregate amounts allocated to the stock instruments and beneficial conversion feature, of $78,529 were recorded as a debt discount at the date of issuance of the Stockholder Convertible Debenture and are being amortized to interest expense using the interest method over the stated term of the Stockholder Convertible Debenture. During the year s ended December 31, 2006, $78,529, of debt discount was accreted and recorded as amortization of debt discounts. In August 2006, the Company and the stockholder agreed to extend the maturity of the Stockholder Convertible Debenture to December 15, 2006 without any additional consideration. In December 2006, the Company and the stockholder agreed to further extend the maturity of the Stockholder Convertible Debenture to April 30, 2007 without any additional consideration.

In August 2007, the Company entered into an Agreement to Convert (the “Agreement”) with Fred Nazem, a stockholder. Pursuant to this Agreement, the stockholder agreed to convert $218,882 due to him in outstanding convertible debentures and accrued interest of $18,882 into 5,472,050 shares of common stock, which includes 4,900,394 shares as an inducement for conversion. The principal amount of $200,000 consisted of $150,000 of Stockholder Convertible Debenture and $50,000 of 2006 Convertible Debenture. The fair value of the inducement to convert approximated $539,000 and was charged to operations during the year ended December 31, 2007 as debt inducement costs.

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Short Term Borrowings

During the year ended December 31, 2007, the Company borrowed an aggregate of $1,170,000 from five individuals, including $50,000 from an officer and director and repaid $200,000 of that prior to December 31, 2007. The amount outstanding as of December 31, 2007 is $970,000 and is due at various dates between January and February 2008. In January and February 2008, the Company repaid an aggregate amount of $620,000. The borrowings are unsecured and bear nominal interest. The Company paid financing costs of $267,005 to third parties and lenders and this amount is being amortized over the term of the borrowings. In 2007, $267,005 was charged to operations as amortization of debt issuance costs. With respect to the borrowings from the officer and director the Company did not pay any financing costs.

In connection with the borrowings, the Company issued the lenders warrants to acquire an aggregate of 890,000 shares of the Company’s common stock. The warrants expire in three years from the date of issuance. The relative fair value of the warrants approximated $68,668 and was recorded as additional discount and is being amortized over the borrowings. For the year ended December 31, 2007, $68,668, of debt discount was accreted and recorded as amortization of debt discounts. With respect to the borrowings from the officer and director, the Company did not issue any warrants.

During the nine months ended September 30, 2008 the Company borrowed an aggregate of $1,110,000 from four individuals and repaid $510,000 of that prior to December 31, 2008. The borrowings included $150,000 from an officer and director and the amount was repaid prior to December 31, 2008. The aggregate amount of 2007 and 2008 short term borrowings outstanding as of December 31, 2008 is $950,000. The borrowings outstanding at December 31, 2008 are due at various dates between January and February 2009. The borrowings are unsecured and bear nominal interest. The Company paid financing costs of $627,873 to third parties and lenders and this amount is being amortized over the term of the borrowings. During the year ended December 31, 2008, $627,873 was charged to operations as amortization of debt issuance costs. With respect to the borrowings from the officer and director the Company did not pay any financing costs. The Company repaid all the amounts due at December 31, 2008 subsequent to the year end.

 

NOTE 9. STOCKHOLDERS' EQUITY

 

In October 2006, the Company's board of directors approved an amendment to the Certificate of Incorporation to increase the number authorized common stock to 200 million shares. The change became effective on November 16, 2006 following a written consent of the shareholders.

During the year ended December 31, 2007, the Company entered into a placement agency agreement with an unaffiliated entity and a consulting agreement with an unaffiliated individual. Pursuant to the agreements, the Company issued an aggregate of 640,000 shares of its common stock. The fair value of the shares was $77,600 and was charged to operations as a consulting expense during the year ended December 31, 2007.

 

						Weighted Average				Weighted Average
		Options				Exercise Price				Fair Value
Outstanding, December 31, 2006			7,100,085			$	0.41			$	0.27
Options granted
Options exercised
Options cancelled			(875,000	)			0.35				0.22
Outstanding, December 31, 2007			6,225,085				0.41				0.29
Options granted
Options exercised
Options cancelled			(175,000	)			0.35				0.22
Outstanding, December 31, 2008			6,050,085			$	0.42			$	0.28
Exercisable, December 31,2008			5,067,793			$	0.41			$	0.27
Exercisable, December 31,2007			4,159,460			$	0.41			$	0.29

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

The following table summarizes information about stock options outstanding and exercisable at December 31, 2008

		Outstanding												Exercisable
						Average				Weighted								Average				Weighted
Range of exercise		Number				Exercise				remaining				Number				exercise				remaining
Price		of options				Price				contractual life				of options				price				contractual life
$0.15 to $0.34			2,575,085			$	0.15				5.0				2,575,085			$	0.15				5.0
$0.35 to $0.50			2,675,000			$	0.35				7.6				1,783,333			$	0.35				7.6
$0.51 and above			800,000			$	1.51				6.4				709,375			$	1.51				6.4
			6,050,085			$	0.42				6.3				5,067,793			$	0.41				6.1

 

						Average grant
		Options				date fair value
Nonvested at December 31, 2007			2,065,625			$	0.26
Granted
Vested			(891,667	)		$	0.22
Cancelled			(191,666	)		$	0.22
Nonvested at December 31, 2008			982,292			$	0.30

 

Year ending December 31, 2009			132,966
		$	132,966

As of December 31, 2008 options outstanding and vested did not have any intrinsic value.

 

NOTE 11. COMMITMENTS AND CONTINGENCIES

 

Leases

 

The Company leases two office spaces under operating leases. The future minimum cash commitments as of December 31, 2008 under such operating leases are as follows:

2009			150,125
2010			142,058
2011			138,997
2012			92,665
		$	523,845

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

As discussed in Note 13, the Company subleased certain office space under an agreement with UCA Global, Inc. ("Global"), whereby the Company paid rent based on the proportion of square footage occupied by the Company in the Global office facility. Pursuant to entering into a lease for a new office premises, the Company has terminated the sublease arrangement effective June 2007.

 

Rent expense incurred with Global during the year ended December 31, 2007 was $63,750 and is included in selling, general and administrative expense on the accompanying statements of operations. Rent expense inclusive of rent paid to Global was $147,000 and $157,000 for the years ended December 31, 2008 and 2007, respectively

 

The Company has an employment agreement with an officer which will expire in May 2008, subject to automatic successive one year renewals unless either the Company or the employee gives notice of intention not to renew the agreement. The agreement provides for an annual base salary of $150,000, with specified annual increases to the base salary. Pursuant to the employment agreement, if the Company terminates the officer's employment without cause or good reason, as defined in the employment agreement, the Company will be obligated to pay a termination benefit equal to the remaining annual base salary during the initial term of the employment agreement. In June of 2008, the Company entered into a new employment agreement with the officer for a term of three years. The new agreement provided for an annual base salary of $250,000 with specified increases and bonus based on the Company’s financial performance. . Pursuant to the new employment agreement, if the Company terminates the officer's employment without cause or good reason, as defined in the new employment agreement, the Company will be obligated to pay a termination benefit equal to the remaining annual base salary during term of the new employment agreement

 

NOTE 12. RELATED PARTY TRANSACTIONS

 

Loans and advances payable to stockholders, officer and director on the accompanying consolidated balance sheet at December 31, 2007 represent amounts owed to stockholders and directors of the Company for advances of cash provided to the Company. Convertible debentures payable to stockholders, officers and director represent amounts received by the Company pursuant to a financing arrangement (see Note 8).

 

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

NOTE 13. INCOME TAXES

 

A reconciliation of the statutory U.S. federal income tax rate to the Company's effective tax was as follows:

		2008				2007
Statutory U.S. rate			34.0	%			34.0	%
Non deductible expenses			(49.9	)%			(31.7	)%
Effect of valuation allowance			15.9	%			( 2.3	)%
Total income tax expense (benefit)			0.0	%			0.0	%

 

		2008				2007
Operating loss carryforwards		$	2,735,000			$	2,881,000
Reserves and allowances			104,000				167,000
Valuation allowance			(2,839,000	)			(3,048,000	)
Net deferred tax assets		$	—			$	—

 

The Company had net operating loss carryforwards of approximately $8,043,000 at December 31, 2008, which expire through 2027. The tax benefit of these losses has been completely offset by a valuation allowance due to the uncertainty of its realization. Internal Revenue Code Section 382 provides for limitations on the use of net operating loss carryforwards in years subsequent to a more than 50% change in ownership (as defined by Section 382), which limitations can significantly impact the Company's ability to utilize its net operating loss carryforwards. As a result of the sale of the shares in private offering and issuance of shares for acquisition and other transactions, and changes in ownership may have occurred which might result in limitations on the utilization of the net operating loss carryforwards. The extent of any limitations as a result of changes in ownership has not been determined by the Company.

 

NOTE 14. SUBSEQUENT EVENTS (unaudited).

 

On March 12, 2009, NetFabric Holdings, Inc. (the “Company”), along with its wholly owned subsidiary, NetFabric Technologies, Inc., d/b/a UCA Services, Inc. (“UCA”) entered into a Convertible Note Purchase Agreement dated March 12, 2009 with Fortify Infrastructure Services, Inc. (“Fortify). Pursuant to the Convertible Note Purchase Agreement, Fortify purchased a Secured Convertible Promissory Note (the “Note”) from UCA in the principal amount of $5 million with the Company being a guarantor for UCA’s borrowings.

 

The Note has a six-month term, and bears interest at 8% per annum, compounded annually. The Note is secured by (i) all of the assets of UCA and the Company and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company. At the exclusive option of Fortify, Fortify may convert the entire principal amount of and accrued and unpaid interest on the Note into shares of Series A Preferred Stock of UCA.  The conversion price shall be at a price equal to the price per share reflecting a valuation of UCA equal to $5 million, on an as-converted basis.

 

 

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NetFabric Holdings Inc. and Subsidiaries

 

Notes to Consolidated Financial Statements

 

Fortify, UCA and the Company also entered into a Credit Agreement whereby Fortify agreed to provide UCA a revolving line of credit of up to $1 million for working capital purposes. Amounts borrowed under the line of credit are secured by (i) all of the assets of UCA and the Company and (ii) all of the equity securities of UCA currently owned or hereafter acquired by the Company.

 

Fortify, UCA and the Company also entered into an Option and Purchase Agreement (“Option Agreement’). Pursuant to the Option Agreement, Fortify has an option to acquire all of the outstanding shares of common stock of UCA. Upon effectiveness of the Company’s Definitive Schedule 14 C Information Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with certain actions taken by the written consent of holders of a majority of the Company’s outstanding common stock approving the terms of the Option Agreement, Fortify will exercise the option. Upon exercise of the Option, the Company will be released from the guaranty obligations of the Note. Fortify will pay the Company $500,000 one year from the date the option is exercised. In addition, Fortify will pay additional amounts to the Company and certain employees of UCA based on UCA’s performance during the periods specified in the Option Agreement.

 

The Company plans to file a Schedule 14C Information Statement with the SEC shortly after completion of its audit for the years ended December 31, 2007 and 2008.

 

The Company used approximately $3 million from the proceeds of the Note to repay all amounts owed to Laurus Master Fund. The balance of the proceeds will be used for repayment of debt, other payables and for working capital purposes.

 

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CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES OXLEY ACT OF 2002

 

I, Fahad Syed certify that:

 

1. I have reviewed this annual report on Form 10-K of NetFabric Holdings, Inc. (the" Company").

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d 15 for the Company and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter ( the Company's fourth fiscal quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and

 

5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company's auditors and the audit committee of the Company's board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting.

 

February 18 , 2010

 

/s/  Fahad Syed

Name:  Fahad Syed

Title: Chairman and Chief Executive Officer

 

 

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EXHIBIT 31.2